Research Lab

What are feasible paths of debt for a government that borrows either internally or externally? The question is suggested by recent concerns about the international debt crisis and high federal budget deficits in the U.S. In this paper, we analyze the benchmark case in which all market participants have perfect foresight, so that only risk-free lending is done. We study the conditions under which the borrower's opportunities include strategies with positive net present value.

Contrary to the conventional wisdom that dividends are the primary means of transferring cash from the firm to its shareholders, nondividend cash payments surpassed dividends in the two most recent years for which data are available, 1984 and 1985 (Shoven 1986). This development challenges the "trapped-equity" cost of capital models 'which equate the cost of retained earnings to the after-tax yield of the alternative considered, namely, dividends.

The bid-ask spread can be decomposed into two parts: one part due to asymmetric information and the other part due to other factors such as monopoly power. The part due to asymmetric information attenuates statistical biases in mean return, variance, and serial covariance. Thus, using spread data to adjust for biases in return moments requires knowing not only the spread but the composition of the spread. Furthermore, any spread-estimation procedure using transaction prices must estimate two spread components.

This paper studies the relation between Value Line's successful record in predicting relative stock price movements and the firm size effect. The data suggest little direct relation between the two phenomena. Value Line tends not to rank small firm stocks, and small firm stocks that are ranked are more likely to receive a low rank than large firm stocks. Within each size-sorted quintile of the market, the mean payoffs on costless positions constructed according to Value Line's recommendations are positive.

The authors propose a likelihood-ratio test of the hypothesis that the minimum-variance frontier of a set of K assets coincides with the frontier of this set and another set of N assets. They study the relation between this hypothesis, exact arbitrage pricing, and mutual fund separation. The exact distribution of the test statistic is available. The authors test the hypothesis that the frontier spanned by three size-sorted stock portfolios is the same as the frontier spanned by thirty-three size-sorted stock portfolios.

Over the past 55 years returns on stock market indexes have on average been higher during the first half-month of calendar quarters 2 through 4 than at other times. Coincidentally, aggregate corporate earnings news arriving at the market during these half-month periods tends to be good, whereas earnings reports arriving later are more likely to convey bad news. In addition firms tend to publish bad-news earnings reports on Mondays, coincident with negative Monday effects in stock returns.

Evidence of excess volatilities of asset prices compared with those of market fundamentals is often attributed to speculative bubbles. This study demonstrates that bubbles could in theory lead to excess volatility, but it shows that certain variance bounds tests preclude bubbles as an explanation. The evidence ought to be attributed to model misspecification or inappropriate statistical tests. One important misspecification occurs if a researcher incorrectly specifies the time series properties of market fundamentals.